Is Greece at a turning point?

The Greek economy has become good headline material for newspapers in recent years, but for all the wrong reasons. Having experienced a boom following its hosting of the 2004 Olympic Games, the party ended in spectacular fashion when Greece failed to meet its debt obligations in 2010 and came close to leaving the euro.

Greece was rescued in extremis by the concerted efforts of the EU, the European Central Bank and the IMF (the so-called Troika). However, the first austerity package failed to turn Greece around, and the country has now experienced the longest and steepest recession anywhere in Europe in recent times, with real GDP contracting for the sixth consecutive year in 2013–by 3.8%, according to the OECD’s latest economic survey of Greece. The consequences for the Greek people have been dire. Salaries have fallen by over a quarter on average, though retail prices kept rising until early 2013. Pensions were reduced by nearly one-third, too, but prices of heating fuel skyrocketed because of tax increases. The unemployment rate now exceeds 26%, and more than half of those under 25 years old are out of a job. Little wonder the Greeks regularly take to the streets to protest against this daily reality.

Inevitably, with the austerity measures exacerbating the recession, the Greek authorities have struggled to raise income tax revenues or bring general government finances under control. But they have nonetheless pushed on with structural reform to redress the imbalances and put Greece on a more sustainable growth path. For the first time, the fiscal accounts are likely to post a primary surplus in 2014, according to the government’s forecast. In addition, among several specific measures, such as a project with the OECD to tackle red tape and reduce the administrative burden on businesses, in November 2012 the OECD and the Greek government signed an agreement whereby the OECD would screen the Greek economy for regulatory barriers to competition. Four sectors were chosen–food processing, retail trade, building materials and tourism–which accounted for 21% of GDP and 26% of employment in 2011 (most recent comparative data). The project was supported by the Hellenic Competition Commission.

Over an 11-month period, the OECD found a total of 555 restrictive provisions that could potentially lead to market distortions, and made 329 individual recommendations for amending or abolishing specific legal provisions.

These reforms are not to be taken lightly. Rather, the OECD estimates the total benefit to the Greek economy to be around €5.2 billion, or 2.5% of GDP, stemming from increased purchasing power for consumers and efficiency gains for companies. The measures would offer greater choice and variety for consumers, as well as provide incentives for firms to innovate and to operate more efficiently. If fully implemented, the recommendations to remove barriers to competition would have an even wider and deeper impact over time on productivity and job creation, as OECD studies show.

Countries such as Australia have demonstrated this in the past, after it carried out a similar but even wider review of all laws and regulations of all sectors of the economy in the 1990s. Reforms followed, and the total result has been a long-term improvement in the GDP growth rate of at least 2.5% above what would have been the case without reform. Recent estimates point to increased growth of as much as 5% annually.

Despite its uphill struggle in recent years, Greece may fi nally be reaching a turning point. Many economists (the OECD among them) forecast a return to positive, albeit modest, growth during the course of 2014 or 2015. The OECD expects the economy to fi rm up somewhat in the second half of 2014, leading to moderate growth of 1.8% in 2015. Businesses are starting to refl ect this confi dence. The forwardlooking purchasing managers index (PMI) reached its highest level in 51 months at the end of September. Even so, households remain nervous, and to restore strength, the Greek authorities need to pursue their reform programme and lock in the results already achieved. To this effect, the government must resist pressure from interest groups intent on protecting their own status quo rather than the well-being of the wider population, and carry on with the necessary reform to the benefit of everyone, including those who need it the most, such as young people and the unemployed.

While 329 reform proposals seems like a big mouthful to swallow for a government that has already been in the international wringer for some time, the nature of the pro-competitive recommendations is very different from anything that has been attempted before. Each of these recommendations refers to a specific legal provision that is holding back competition and that not only affects markets but undermines people’s welfare. Some regulations are leftovers from bygone times, such as restrictions on the type of peppers that one can import, the way apple vinegar should be bottled, or requirements for bakers to store oats and salt in large amounts. Others, such as legal restrictions on the shelf life of milk, for instance–outside Greece sell-by dates are decided by the dairy suppliers, not the government–make it virtually impossible for newcomers, whether Greek or foreign, to enter the market for fresh milk owing to the high costs related to supplying supermarkets and collecting the milk again before the sell-by date. The cost of obtaining a licence to produce asphalt is also prohibitively high, reflecting regulations on the size of storage tanks (2,000 cubic metres) and minimum start-up capital requirements (€500,000). This clearly cramps construction and infrastructure activity.

Similar restrictions are found for other activities. Also, retailers cannot freely discount their products, or conduct promotional offers for more than 10 days every two months, or even advertise their seasonal sales. A Greek cruise ship cannot leave passengers in a port and continue a journey–all passengers must embark and disembark in the same port, which is a competitive disadvantage compared with other cruisers. The list goes on. Cleaning up this legislative archipelago will make for a better overall investment climate as legal uncertainties are removed and the economic and administrative machinery is oiled. Improving the ability of Greek businesses to compete will benefit not only firms but also consumers, by boosting efficiency, turnover and job creation for years to come. But in order for these benefits to be felt across the Greek economy, the recommendations must be fully implemented. Partial reform will yield only partial results, and Greece’s Olympian efforts at recovery risk becoming a long and painful marathon.

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